George Osborne will take the first steps to redeem his pledge to tackle corporate tax abuse by big technology multinationals in the autumn statement, which will see a final admission that the government failed to fulfil its central economic mission of eliminating the underlying deficit by 2014-15.
The chancellor is expected to have to concede that net borrowing for the year will reach about £90bn – greater than the £86.5bn predicted at the time of the last budget – but in a statement shaped by the continued constraints on the public finances, Osborne will try to highlight plans to take urgent action to clamp down on tax loopholes exploited by technology firms such as Amazon and Google, even though the most effective action requires international agreement.
In what is also expected to be a highly politicised pre-election address, the chancellor will insist that the country faces a stark choice between staying “the course to prosperity” or instead “squandering the economic security we have gained and go back to the disastrous decisions on spending and borrowing and welfare that got us into this mess”.
The coalition parties will try to illustrate the contrast with Labour by recommitting themselves to eradicating the current structural deficit by 2017-18, and may stage a quick Commons vote to force the opposition to say whether it will sign up to the same target. Until now Labour has said only that it would erase the deficit as early as possible in the next parliament.
On Tuesday, Danny Alexander, the Treasury chief secretary, said the necessary cuts were achievable. He said that £100bn had been saved so far, and that only a quarter or a third more consolidation was needed in the next parliament.
Labour’s initial reaction to the ploy was to argue that Osborne had been forced into a political retreat since the Conservatives had backed a more demanding target of eradicating both the current and capital deficits by 2017-18.
But Ed Balls, the shadow chancellor, will face resistance from unions and sections of his own party if he commits to reducing the current deficit at the same pace as the coalition parties. In what is likely to be the beginning of the election skirmishing over the economy, the shadow chancellor wants to be able to argue he would end the current deficit in a different way, including through tax rises, as well as pointing to his freedom to increase capital spending.
On technology multinationals, Osborne is insisting that the quid pro quo for what he believes is a generous corporate tax regime is a commitment by big multinationals to pay the tax they owe and end the freeloading that has characterised the behaviour of some of them. Corporation tax has been cut by the Treasury from 28% in 2008 to 21%.
A poll conducted for Christian Aid and Action Aid this week found just one in five people believe political parties have gone far enough in their promises to tackle tax avoidance by large companies. At the Conservative conference Osborne promised to use the autumn statement to crack down on technology firms that went to extraordinary lengths to avoid paying tax.
On Wednesday, HM Revenue & Customs is expected to propose reforms that try to “look through” whether internet firms that book profits overseas on activities and transactions are in reality undertaking the activity in the UK, and hence liable for tax. France, Germany and Italy have launched a joint bid to pass a new EU directive on tax avoidance by the end of the year.
One survey found seven giant US technology firms paid £54m in UK corporate tax in 2012. The only revenue booked in the UK was the commission paid by the European head office for the sales and marketing services carried out in Britain. Their UK turnover was just £1.7bn in 2012, even though their overall sales to British customers totalled $15bn (£9.6bn).
The Treasury also revealed that measures to strengthen lending to small and medium-sized business (SME) would be a key feature, including measures to unlock a further £1bn of new finance.
Osborne will announce an additional £400m to expand and extend the British Business Bank’s flagship venture capital programme, the Enterprise Capital Fund, as well as measures to increase funding for the Enterprise Finance Guarantee scheme.
That would allow the British Business Bank to guarantee up to £500m of new lending in 2015-16, and the Treasury said that these two schemes together would further help the Business Bank achieve its aim of unlocking £10bn of finance for SMEs by 2017-18. The separate Funding for Lending Scheme designed to encourage the banks and building societies to lend will be extended for a further year.
In potentially one of the most important announcements, Alexander said the government was now looking at the feasibility of the government directly commissioning the building of homes on public land for eventual sale. The chief secretary also admitted that despite an increase in growth forecasts, borrowing was likely to be higher this year due to lower than expected tax receipts.
“We haven’t seen tax receipts – particularly income-tax receipts – grow as strongly as was forecast. We are seeing a lot more people entering the labour market, a lot of young people entering the labour market, who inevitably start on lower wages … That means income-tax receipts are weaker.”
On existing plans, it now looks unlikely that Osborne – if he remains as chancellor – would be able to run a small overall surplus in 2018-19, which was pencilled in at £4.8bn in the 2014 budget.
However, the public finances still look to be on course to move into the black by 2017-18 on a key deficit measure: the cyclically adjusted current budget. This is a measure of spending on the day-to-day government running costs, excluding spending on capital projects, adjusted to take account of the economy’s ups and downs.
The Office for Budget Responsibility said in the 2014 budget that the government was on course to run a surplus of 0.7% of GDP on this measure by 2017-18 – about £14bn. Although this estimate is likely to be revised down, there should be enough leeway in the original forecast for the chancellor to set a formal target.
Balls said: “David Cameron and George Osborne have now failed every test and broken every promise they made on the economy. This cost-of-living crisis is why the chancellor will have to admit he has broken his promise to balance the books by next year.”
